2018 Article IV Consultation-Press Release; Staff Report and Statement by the Executive Director for St. Vincent and the Grenadines
Our St. Vincent and the Grenadines (SVG) authorities highly appreciate the Fund’s continued support and thank staff for the productive engagement during the Article IV consultations. They welcome the report, value staffs advice, and appreciate the report’s acknowledgement of noteworthy macroeconomic progress. That said, our authorities are of the view that the report could better highlight advances on structural reforms.
The government remains focused on transforming SVG into a more vibrant, competitive, and inclusive economy. In line with this objective, SVG will accelerate policies geared toward furthering fiscal consolidation, enhancing the business environment, and strengthening resilience to natural disasters and climate change. These efforts, to be accompanied by measures to bolster social protection, will be instrumental in diversifying the economic base and stimulating private-sector led job-rich growth.
Recent Economic Developments
Economic expansion continues to strengthen while inflation remains benign. Preliminary estimates point to an acceleration of growth in 2018 to 2.5 percent from an average annual growth rate of 0.8 percent over the previous three years. Growth was hampered in 2016 and 2017 by the closure of the island’s largest hotel and adverse weather conditions – flooding and landslides. Underpinning the growth uptick was the strong performance of tourism and construction. The opening of the new Argyle International Airport in early 2017 – an important pillar of the economic transformation process – buoyed tourism flows. SVG also benefited from increased demand for construction materials by Dominica following Hurricane Maria in 2017. At the same time, higher commodity and fuel prices led to an uptick in average inflation to just over 2 percent, following years of deflation.
Fiscal performance supported debt reduction objectives. The primary balance remained in surplus and contributed to a reduction in public debt to an estimated 73 percent of GDP in 2018 from over 82 percent in 2016. Revenue collections were behind budget, however, restraint in current spending and under-execution of capital programs resulted in an estimated overall fiscal deficit of 2.0 percent of GDP, compared to the budgeted 6.7 percent.
Our authorities have advanced efforts to safeguard the stability of the financial sector. The sector remains broadly stable, but concerns linger about the loss of correspondent banking relationships (CBR), and de-risking more broadly. Notable progress in addressing AML/CFT deficiencies included amendments to several pieces of legislation and ongoing work on the National Risk Assessment (NRA). Of note, banks maintained high capital ratios while NPLs continued to decline and remained below the ECCU average.
Economic Outlook & Policies
Steady and sustained implementation of credible policies remain key to strengthening, diversifying, and inclusively growing the SVG economy. While our authorities consider the outlook to be favorable, they remain fully aware that SVG, like many small island states, is highly susceptible to external shocks and adverse weather conditions. Building on steps already taken to improve its ability to respond to natural disasters, enhance human capital, and upgrade the physical and legislative infrastructure, the government will continue to advance a multi-pronged approach geared toward tackling vulnerabilities and transforming the economy.
The growth outlook is positive but there are downside risks. Real economic output is estimated to grow at 2.5 percent for 2018 and slightly higher over the medium term. Our authorities are nevertheless mindful of inherent risks from, inter alia, natural disasters, higher commodity prices, and weaker than expected global growth. The new climate-resilient international airport has improved connectivity and is expected to further boost tourist arrivals and seafood exports, with positive spillovers to connected sectors. Significant private investment to boost hotel room stock, as well as large public infrastructure projects, including those related to climate change and upgrading of the road network, geothermal energy, and port facilities provide the impetus for stronger growth.
Fiscal Policy and Debt Management
Fiscal policy will be shrewdly managed within the context of achieving the ECCU debt/GDP target of 60 percent by 2030 while supporting economic transformation. Our
authorities agree in principle with staffs suggestion that accelerating fiscal consolidation will help to build buffers and reduce debt faster. However, this must be carefully balanced against the need to stimulate higher levels of growth and reduce high unemployment and poverty. In this regard, the 2019 budget forecasts a significant scaling up of capital expenditure. While this may cause the public debt to rise in the near term, the magnitude of increase would be moderated by faster growth and planned measures to boost revenue and contain current spending. The medium-term fiscal framework (MTFF) that informs the 2019 budget contains critical growth-friendly projects to be completed over the next two to three years. These include climate change-related projects that account for close to 40 percent of the capital budget, port modernization, and the geothermal plant, which on completion is expected to raise renewable energy usage to about 80 percent. Given the expected growth dividend alongside improved fiscal performance, our authorities are confident of remaining on course with the 2030 Debt/GDP target.
Efforts will be stepped up to drive ongoing and planned fiscal reforms. The government’s MTFF that underpinned this year’s budget will be tabled in Parliament shortly. Going forward, the MTFF will be the cornerstone of future budgets. Measures to mobilize revenue are underway with plans to table the Tax Administration and Procedures Act in Parliament during the first quarter of 2019. The proposed changes will considerably close tax loopholes currently being exploited by corporates. Additionally, regulations will be promulgated to enhance operations and oversight of SOEs. Pension reform also forms a critical part of our authorities’ program to contain current spending and discussions surrounding the design of a scheme are advancing.
Actions to bolster financial system stability will intensify. Recent legislative enhancements have yielded a more robust AML/CFT regime. Nevertheless, our authorities will continue to work assiduously to ensure that the framework remains compliant with international standards and commit to completing the NRA by September this year. Following good progress in the stress testing of credit unions, the FSA will extend the exercise to the insurance sector. Our authorities are seized with the urgency of strengthening vigilance over the financial sector. In this regard, an adequately-resourced FSA remains a priority, and the government will enact legislation to bolster the FSA’s enforcement powers. The government also continues to collaborate with the ECCB as part of an ongoing regional initiative to establish a modern credit reporting system. Our authorities acknowledge that there are scale economies from consolidation and, in this context, they will pursue strategies for amalgamating small local banks, including within the wider ECCU region.
Our authorities will accelerate implementation of reforms to expand growth potential. SVG has implemented some key reforms to strengthen fiscal management and enhance financial sector supervision, but a lot more is required for the country to take advantage of existing and potential opportunities. The new international airport with direct flights to main source markets has expanded tourism prospects. To capitalize on these opportunities, our authorities will forge closer linkages between tourism and other sectors, particularly agriculture. The geothermal plant promises lower electricity costs, which will enhance competitiveness. However, the quality of the physical and human infrastructure needs to keep pace with these developments. Against this backdrop, the government is taking decisive steps to accelerate project implementation with donor support. They will also move with dispatch to review the current procedural and legislative framework for investment with a view to simplifying the requirements. To ensure that the workforce is in sync with labor market demands, the government will provide additional resources to expand skills training in the technical and vocational areas. These activities are all crucial to stimulate private sector investment and generate jobs in various sectors of the economy.
Social protection remains a priority for the government. Broad-based support is integral to the success of the reform agenda. To ensure that all Vincentians benefit from the economic transformation, our authorities endeavor to protect social spending, including intensifying targeted support toward gender development, childcare, and youth empowerment.
Strengthening Resilience to Natural Disasters and Climate Change
Our authorities consider natural disasters and climate change to be their most formidable near-and long-term threats. They appreciate staffs tailored stress tests incorporating natural disasters into the DSA. Strengthening resilience will provide important growth and fiscal dividends. The establishment of a Contingencies Fund in 2017, strictly for funding expenses related to natural disasters, was an important step in this regard. Moreover, the 2019 budget includes a sizeable allocation to climate-related projects, including allocations to the Natural Disaster Management and the Regional Disaster Vulnerability Reduction projects amounting to about 2 percent of GDP. This is further demonstration of the significance that the government attaches to resilience building.